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Monday, March 13, 2017

Why California's Push for a 100 Percent Carbon Free Grid is the Wrong Way Forward

Although there is a clear lack of will to do much about climate change at the federal level, California is another story. In a recent poll, 69 percent of California voters backed policies to cut emissions. The latest sign of enthusiasm is a bill
introduced by State Senate leader Kevin De León that would completely
decarbonize the state's electric grid by 2045. Currently, California
state law calls for half of all retail electricity to be produced from
renewable sources by 2030, with an intermediate goal of 25 percent by
2016, reached slightly ahead of schedule.

Is 100 percent decarbonization feasible? Anne C. Mulkern, writing for E&E News,
reports that several experts she talked to said it was. Utility
executives were somewhat more skeptical, but Pedro Pizarro, CEO of
Edison International, agreed that 100 percent renewable power was
technically possible, while expessing concerns about reliability, and
timing.

Even if the goal is technically it possible, though, does
it make sense to mandate a goal of 100 percent renewable electric power
by a certain date? In my view, it does not. Carbon pricing remains a
better tool for reducing California's carbon footprint.

Carbon pricing California style

But,
you might say, hasn't California already tried carbon pricing with its
flagship cap-and-trade scheme? Yes, and it isn't working very well.
However, if we look carefully, we will see that the problems arise from
circumstances particular to the state, rather than from any inherent
flaw in carbon pricing as a concept.

The economic reasoning behind
cap-and-trade is to give companies an incentive to reduce emissions by
requiring them to buy a permit for each ton of carbon dioxide they emit.
The higher the price of permits, the greater the incentive. Prices are
set by monthly auctions supplemented by a secondary market, in which
permits can change hands privately.

The problems this policy
currently faces in California are both economic and legal. The immediate
economic problem is a surplus of permits relative to demand. Recent
monthly auctions have seen the price fall to the minimum allowable level,
currently just over $13 per ton. In some months, as few as 11 percent
of permits on offer have actually been sold. Some optimists bravely
maintain that low prices show the program is cutting emissions faster
than expected—but even if that is the case, it does not change the fact
that low prices mean weak incentives to cut emissions going forward.

The
cap-and-trade program’s legal woes are making the problem of low prices
worse. Business groups have challenged it in court on the grounds that
cap-and-trade is really a tax in disguise, but one that did not receive
the two-thirds supermajority in the state legislature that is required
for new taxes. If the suit succeeds, the program is likely to expire in
2020. The legal uncertainty adds to the program’s economic problems by
undermining the demand for permits, thus keeping prices close to the
floor.

Why command-and-control is the wrong solution

The
threats to the cap-and-trade program are real, but pure
command-and-control regulation, as in De León's latest proposal, would
be a step backward. Economists are not the only ones who think so. Some environmentalists are worried, too. As I have explained elsewhere for the case of auto emissions,
excessive reliance on command-and-control regulations, rather than
pricing, can enormously increase the cost of reaching abatement goals.
The same is true of renewable energy mandates for the power grid.

The
main economic problem facing renewable electric power is that of
diminishing returns. It is possible to install great numbers of solar
panels and wind turbines, and even to achieve economies of scale,
measured in terms of the cost per kilowatt-hour of capacity, as the
installations get larger. However, the problem remains of getting the
power to users where and when it is needed. The output of solar and wind
installations is variable, and the timing of output does not always
coincide with the timing of demand. As the number of renewable
installations attached to the grid goes up, the percentage of the
potential power output that can actually be used goes down and the cost
per kWh rises.

The problem of timing can be mitigated by building
more storage capacity, but storage is expensive, too. The need for
storage increases faster than in proportion to the renewable share of
generation capacity, so more storage also leads to rising cost per kWh.

Price-based
conservation measures like cap-and-trade or pollution taxes are well
suited to dealing with the problem of diminishing returns. Putting a
price on carbon emissions spreads the incentive to conserve over all
types of energy use while giving an incentive to undertake the
least-cost decarbonization measures first.

Suppose, just to pick a
number, the price placed on carbon emissions is $20 per ton. When the
share of renewables on the power grid is low, the cost of saving carbon
by building more wind and solar capacity is likely to be less than $20
per ton, so more gets built. By the time renewables reach, say, 80 or 90
percent, the cost of saving one more ton of carbon will be much
higher. Taking low utilization rates and high storage costs into
account, it will very likely be far more than $20 per ton.

Somewhere
in between, there is a point where the cost of additional carbon
reduction through renewable electricity just equals the price of carbon.
Although it is not immediately cost-effective to expand renewable
capacity, that does not mean an end to decarbonization. The threshold of
cost-effectiveness will gradually increase over time as generation and
storage technology improve. Meanwhile, decarbonization efforts will turn
to other areas—such as the transportation or industrial sector—where it
is more cost effective. If the level of emissions is still too high
after all cost-effective measures have been taken in of these areas,
then they can be driven lower still by raising the price of carbon.

If you want to decarbonize, do it right

For
all these reasons, the proper response to the uncertain future of
California’s decarbonization efforts should not be a retreat to a purely
regulatory approach. Rather, it should be to move forward to a stronger
system of carbon pricing.

If the state’s cap-and-trade system
were on strong legal footing, it might be enough to restrict the number
of permits issued, or raise the minimum price of allowances, or both.
However, in the event that the courts declare cap-and-trade to be a tax
in disguise, the problem becomes one of assembling the two-thirds
majority needed to pass a tax law—perhaps not impossible, if public
opinion favors decarbonization as strongly as polls indicate. Such a
supermajority could reauthorize the current cap-and trade system, or
better still, replace it with a robust carbon tax.

Should it prove
impossible to overcome the legal and political barriers to appropriate
carbon pricing, the future of decarbonization will be uncertain. Yes, it
might be possible to get a simple majority in the legislature an
aspirational goal of 100 percent renewable power by 2045, but doing so
would not necessarily produce a happy outcome.

One study
compares 100 percent decarbonization to the ramping up of aircraft
production from near zero to 330,000 planes per year during World War
II, in terms of the political will it would require. How would it be
possible to summon up that degree of support for an inefficient
command-and-control approach if there is not the will to pass a much
less costly carbon tax, or even to put cap-and-trade on a proper legal
footing? More likely, a premature effort to achieve 100 percent
renewables would lead to missed deadlines, cost overruns, and the
discrediting of the whole idea of decarbonization. DeLeón's initiative
is not a way forward. It is a blind alley.

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